Funding howlers and headaches
Article Date: May 05 2006
Investors wearing two hats
‘Conflict can also arise if you accept an integrated debt and equity package (a loan as well as a proportion of your equity) from one particular lender or institution,’ warns Millington. ‘That can create a clash because, in effect, they are a hybrid person. Are they viewing their involvement from an equity or a debt perspective? As an equity provider, they may well insist on a place on your company’s board and might become disgruntled if you don’t do well for them on the equity side (not paying them a dividend, for example). This could then affect their attitude toward debt provision, perhaps making them more forceful about repayment.
‘Many growing companies take in equity investment when they don’t need to,’ claims Lane. ‘For example, I’ve seen business chiefs reject the idea of taking out a loan when this is the best option in their set of circumstances, and others fail to consider finance through factoring because they don’t know much about how it works. Either option could have enabled them to keep all the equity in their company.’
He also believes, ‘Too many fast-growing firms get into trouble through overtrading. The entrepreneur goes for so much growth that eventually they just can’t finance it, so the company runs out of cash and they cannot pay the wages. Remember, cash is the oil that makes all the wheels turn.’
Grasp all the finer details
Hood believes that relying on leasing and hire purchase to fund growth can be problematic as well. He says, ‘Just because the leasing company is funding this machine or that fleet doesn’t mean that you own the assets. It’s still the finance company’s even if you get halfway through paying it back.
‘And if the pricing of the lending seems too good to be true, make sure you look carefully at the small print and the exit route,’ he cautions.
Likewise, sloppy forecasting is a fertile area where financial howlers can bloom. ‘It’s vital that you have really robust and detailed financial forecasting, and make sure you do your budget more than once a year,’ states Hood. ‘In fact, as a fast-growing company I think it’s important to look at your budgets quarterly to keep up with changes. Financing growth is a tricky and arduous proposition at the best of times, but to sidestep potential disaster you need to have a full financial understanding of where your company is at now, where it’s heading and the different funding routes available to help it get there.
Another way forward: Invoice financing
Invoice discounting and factoring are proving popular these days among business leaders looking to ease cash flow and provide growth capital. One company that’s made this type of funding option work well is SOS Recruitment.
Like many entrepreneurs before her, founder Donna Boyles started her own business as a result of being a frustrated consumer. It was her experience of recruitment agencies and the poor customer service she had received that led her to take a career gamble and start her own venture.
SOS Recruitment began trading in earnest in 1999 from modest premises in Banbury. At first, the business focused on recruiting permanent employees for organisations in the commercial sector, from office juniors to senior managers. However, with a growing demand from clients for temporary employees to support their business in times of unexpected growth and peaks in trading, Boyles recognised the potential for providing her clients with skilled temporary workers.
The expansion of the business’ portfolio to include temporary candidates paid off, but triggered a financial challenge. In keeping with the industry norm, Boyles had to pay her temporary workforce on a weekly basis while her incoming revenue was subject to the normal 90-day payment terms.
Boyles was reluctant to risk jeopardising relationships with blue-chip clients by trying to renegotiate payment terms. Instead, she decided to tackle her cash flow problem by reviewing the different forms of funding available to her.
She says: ‘I needed to find a finance option that would provide me with the same kind of flexibility I was extending to my customers.’ Through its invoice finance services, Bibby Financial Services was able to provide Boyles with the solution.
‘Invoice financing releases up to 85 per cent of the value of our unpaid invoices as we raise them,’ explains Boyles, ‘giving us an ongoing supply of cash linked to our sales. Bibby also handles all collections from our clients. This arrangement has given us the time and financial freedom to grow the business – we now have around 60 temporary workers out on assignments every week.’
SOS Recruitment has doubled its revenue and plans to open an office in Oxford this year to complement its Banbury headquarters.
